IMF: The Times They Are A-Changin’

 

By Robert Weissman*, April 14, 2008. CommonDreams.Org

Have things changed at the International Monetary Fund? Or is the world just witnessing yet another in a long series of global economic double standards?

IMF Managing Director Dominique Strauss-Kahn says that the “need for public intervention” to address the global financial crisis “is becoming more evident.” Strauss-Kahn has urged for a global fiscal stimulus, writing that, “Timely and targeted fiscal stimulus can add to aggregate demand in a way that supports private consumption during a critical phase.” The IMF has announced its support for the fiscal stimulus plan in the United States — a country with significant budget deficits and massive foreign debt.

The support for government intervention runs directly counter to the IMF’s longstanding support for strait-jacketing governments in poor countries, by demanding “structural adjustment” — a series of market fundamentalist, corporate-friendly policies, including hyper-restrictive macro-economic policies.

So far, there is little evidence that the IMF is changing the way it operates in developing countries. But maybe the times are changing, whether the IMF likes it or not. The IMF gets its power from a gatekeeper role in international finance and donor circles. International lenders and government aid donors commonly limit their lending and aid donations to countries in the IMF’s good graces. The logic is that the IMF is competent to determine that the recipient countries are pursuing sensible economic policies, and therefore equipped to manage loans or aid.

The IMF has capitalized on its gatekeeper role to demand countries pursue a cookie cutter, market fundamentalist agenda of blind deregulation, sell-offs of public assets to corporations (privatization), opening up economies to foreign investors, tariff cuts, and government spending cuts.

There is overwhelming evidence of the failure of the IMF’s policy agenda. Mass privatization has led to enormous concentrations of wealth and encouraged corruption. Deregulation has contributed to financial crises, including those that foreshadowed the current global crisis centered in the United States. The overall economic model had impoverished tens of millions and left developing countries poorer. And government budget ceilings and inflation targets have prevented countries from expanding desperately needed investments in healthcare and education. Indeed, the IMF’s own Independent Evaluation Office has found that the Fund requires poor countries not meeting Fund inflation targets to divert most new donor aid. Instead of spending additional donor money on healthcare, for example, countries must use it to build up foreign reserves or pay down domestic debt.

Although the Fund has promised that it would reform the way it imposes conditions on poor countries, a new report from Eurodad, the European Network on Debt and Development, finds that, over the last six years, IMF conditions have not changed in number or kind.

One thing has changed, however. Impressed by the IMF’s repeated failures, middle-income countries have paid back their loans to the Fund, and are not taking out any news ones.

This in turn has two consequences. For now, at least, the IMF has lost its hold over most middle-income countries — but it maintains its iron grip on the world’s poorest countries. And, the Fund is experiencing a financial crunch of its own. It had depended on the interest payments from middle-income countries to support its budget.

Developing countries are not shedding tears over the IMF’s financial distress. “At long last, the IMF is experiencing first hand serious budget cuts,” says Cheikh Tidiane Dieye of Environment and Development in Africa (ENDA), based in Senegal. “The poetic justice of this is palpable. In Senegal, the IMF has mandated budget cuts for years. As a result, we have been unable to invest in health care, education and other essential services. If the IMF’s loss of financial power is accompanied by a loss in political power, this could be good news for all Africans.”

The IMF’s governing body has just approved a proposal that would involve cutting its staff by about 20 percent and selling some of its gold stock to create a trust fund that would fund administrative operations in the future.

The gold cannot be sold without U.S. approval, however, and the U.S. representative to the Fund cannot support gold sales without Congressional authorization.

Health, development and labor organizations in the United States are mobilizing so that Congress approves gold sales only after achieving fundamental changes in IMF policy. Last week, 80 U.S. organizations — including Action Aid International USA, the AFL-CIO, Africa Action, the Bank Information Center, Essential Action (which I direct), 50 Years is Enough, Global AIDS Alliance, Health GAP, Jubilee USA Network, the ONE Campaign, Oxfam America, RESULTS USA, Service Employees International Union (SEIU), and the Student Global AIDS Campaign — urged Congress not to approve gold sales until first achieving real change at the Fund.

The letter says the Congress should require the IMF to: rescind the use of overly restrictive deficit-reduction and inflation-reduction targets; exempt expanded health and education spending in developing countries from IMF-imposed budget ceilings; permit developing countries to spend foreign aid for its intended purposes; delink debt cancellation from harmful economic policy conditions; and disclose crucial documents currently kept secret.

If the gold sales deal is approved, the IMF will become self-financing, and the U.S. Congress will lose much of its power to demand changes in how the IMF operates. So the present opportunity will not soon present itself again. There is no certainty about when the gold sales authorization will come before Congress, but it now seems as though it may be delayed until 2009.

Perhaps the IMF under the leadership of Strauss-Kahn, who took the helm of the institution only last September, is ready to re-evaluate its market fundamentalist, corporate-friendly policy prescriptions for poor countries. A statementissued by the Fund last week said that African countries did not need to raise interest rates in response to inflation driven by higher prices of food and fuel, and that some subsidies might be permissible in some circumstances. This is perhaps a baby step forward.

But if the IMF is not ready on its own to jettison its long-standing policy demands for poor countries, it may soon find that it has no choice. Representative Barney Frank, D-Massachusetts, chairs the House Financial Services Committee, which must approve the gold sales proposal prior to the full House of Representatives considering the issue. At the 20th anniversary celebration of the Bank Information Center last week, he strongly denounced structural adjustment, stated as a matter of fact that gold sales will only be authorized if additional IMF gold is sold to cancel poor country debt, and made clear that he intends to obtain policy changes from the IMF as a condition of permitting gold sales.

Further Resource:

Read a news report on IMF: Will these men save the world? (Guardian, UK). 

*Robert Weissman is co-director of Essential Action, a corporate accountability group based in Washington, D.C. that focuses especially on international issues and has been very involved in the access to medicines campaign. He is also editor of Multinational Monitor magazine. With Russell Mokhiber, he is editor of a weekly column, Focus on the Corporation, archived at http://lists.essential.org/pipermail/corp-focus.

The Global Financial System in Crisis

 

By Walden Bello*

Speech at the Seminar on “Dismantling Obstacles to Advancing Development Agenda and Accountability,” People’s Development Forum, Bahay ng Alumni, University of the Philippines, 25 March 2008.

I have been asked to address the issue of the international financial architecture that provides the context for aid flows. 

My response is what architecture?  In fact, we now stand on the brink of what former US Federal Reserve Chairman Alan Greenspan last week characterized as possibly the worst economic crisis since the Second World War because of the lack of architecture or structure to govern global capital flows. The so-called subprime mortgage crisis that has resulted so far in losses of some $400 billion and threatens a chain reaction of collapsing financial institutions globally is the end product of a process of deregulation of financial markets that began during the Reagan-Thatcher era.  This is the latest of some 100 financial crises in the last 30 years, according to the count of the Brookings Institution.

Owing to the devastating impact of uncontrolled gyrations and permutations of speculative capital, there were calls for capital controls and a return to strong financial regulation following two of these crises: the Asian financial crisis in 1997 and the dot.com craze of the late 1990s. The first event led to the economic collapse of all the so-called Asian tiger economies that did not impose capital controls, the second to the wiping out of $7 trillion in investor wealth and the US recession of 2001.  I am sure we all still remember how during the Ramos years, some $19.4 billion entered the country between 1994 and 1997 and left in a flash in July and August of 1997, dragging down the peso from 25:1 to 54:1 in the course of the next few months and bringing us to recession in 1998. 

Nothing came of these demands for capital controls as the global financial elite refused even the weakest regulatory mechanisms that were proposed.  Instead, “self-surveillance” and “self-policing” was the alternative pushed by the private sector, even as it removed the last remaining barriers to capital flows across borders and devised ever more sophisticated financial instruments such as derivatives.  In this connection, just as they said they would be model debtors and pay off all the country’s debt according to the terms of the creditors during the Aquino period, so did our financial authorities dutifully repeat international financial capital’s mantra against the imposition of capital controls during the Ramos presidency and afterwards.

What happens when you eliminate or water down state regulation of financial activity is provided by the Wall Street Journal’s summary of a recent report on the subprime crisis by the G7’s Financial Stability Forum:

[T]here is plenty of blame to go around for the financial chaos: The US subprime mortgage market was marked by poor underwriting standards and ‘some fraudulent practices.’ Investors didn’t carry out sufficient due diligence when they bought mortgage-backed securities.  Banks and other firms managed their financial risks poorly and failed to disclose to the public the dangers on and off their balance sheets. Credit-rating companies did an inadequate job of evaluating the risk of complex securities.  And the financial institutions compensated their employees in ways that encouraged excessive risk-taking and insufficient regard to long-term risks.

Deregulation of financial markets is the immediate cause of the current financial crisis.  However, we cannot have a comprehensive understanding of the crisis unless we ask why radical deregulation of financial markets occurred in the first place.

One chieftain of a financial corporation writing in the Financial Times captured the basic reason behind financial liberalization, perhaps unwittingly, when he claimed that “there has been an increasing disconnection between the real and financial economies in the past few years.  The real economy has grown…but nothing like that of the financial economy, which grew even more rapidly—until it imploded.”  What his statement does not tell us is that the disconnect between the real and the financial is not accidental, that the financial economy expanded precisely to make up for the stagnation of the real economy.

This growing gap between the financial and the real cannot be comprehensively understood without referring to the crisis of overaccumulation that overtook the center economies in the late seventies and 1980’s, a phenomenon that is also referred to as overproduction or overcapacity.

The golden period of postwar growth globally that skirted major crises for nearly 25 years was due to the massive creation of effective demand via rising wages for labor in the North, the reconstruction of Europe and Japan, and the import-substituting industrialization in Latin America and other parts of the South.  This was done principally via state intervention in the economy.  This dynamic period came to a close in the mid-seventies, with stagnation setting in, owing to global productive capacity outrunning global demand, which was constrained by continuing deep inequalities in income distribution.  According to the calculations of Angus Maddison, the premier expert on historical statistical trends, the annual rate of growth of global gross domestic product (GDP) fell from 4.9 per cent in what is now regarded as the golden age of the post-World War II Bretton Woods system, 1950-73, to 3 per cent in 1973-89, a drop of 39 per cent.  These figures reflected the wrenching combination of stagnation and inflation in the North, the crisis of import substitution industrialization in the South, and erosion of profit margins all around.

In the eighties and nineties, global capital blazed three escape routes from the specter of stagnation.  One was neoliberal restructuring, which included redistribution of income towards the top via tax cuts for the rich, deregulation, and an assault on organized labor.  Neoliberalism took the form of Thatcherism and Reaganism in the developed North and World Bank and International Monetary Fund (IMF)-imposed structural adjustment in the global South.

Another was corporate-driven globalization or “extensive accumulation,” which opened up markets in the developing world and moved capital from high-wage to low-wage areas.   As Rosa Luxemburg long ago pointed out in her classic The Accumulation of Capital, capital needs to constantly integrate precapitalist societies to the capitalist system to shore up the rate of profit.   In the last two decades, the most spectacular case of incorporating a precapitalist society into the global capitalist system was China, which became both the world’s second biggest exporter and the primary destination of foreign investment.

A third was the process we are mainly concerned with here: “intensive accumulation or “financialization,” that is, the channeling of investment towards financial speculation, where much greater returns were to be derived than in industry, where profits were largely stagnant.  Finance capital forced the elimination of capital controls, the result being the rapid globalization of speculative capital to take advantage of differentials in interest and foreign exchange rates in different capital markets. These volatile movements, the result of capital’s liberation from the fetters of the post-war Bretton Woods financial system, was one source of instability. Another was the proliferation of novel sophisticated speculative instruments like derivatives that escaped monitoring and regulation.  Instability derived ultimately from the fact that speculative finance boiled down to an effort to squeeze more “value” out of already created value instead of creating new value since the latter option was precluded by the problem of overproduction in the real economy.

The disconnect between the real economy and the virtual economy of finance was evident in dot.com bubble of the 1990’s.  With profits in the real economy stagnating, the smart money flocked to the financial sector.  The workings of this virtual economy were exemplified by the rapid rise in the stock values of Internet firms which, like Amazon.com, still had to turn a profit.  The dot.com phenomenon probably extended the boom of the 1990’s by about two years.  “Never before in US history,” Robert Brenner wrote, “had the stock market played such a direct, and decisive, role in financing non-financial corporations, thereby powering the growth of capital expenditures and in this way the real economy.  Never before had a US economic expansion become so dependent upon the stock market’s ascent.”  But the divergence between momentary financial indicators like stock prices and real values could only proceed to a point before reality bit back and enforced a “correction.” And the correction came savagely in the dot.com collapse of 2002, in the form of the wiping out of $7 trillion in investor wealth.

A long recession was avoided, but it was only by encouraging another bubble, the housing bubble, and here, Alan Greenspan played a key role by cutting the federal funds rate to a 45-year low of 1 per cent in June 2003, holding it there for a year, then raising it only gradually, in quarter-percentage-increments.  As Dean Baker put it, “an unprecedented run-up in the stock market propelled the US economy in the late nineties and now an unprecedented run-up in house prices is propelling the current recovery.”

The result was that real estate prices rose by 50 per cent in real terms, with the run-ups, according to Baker, being close to 80 per cent in the key bubble areas of the West Coast, the East Coast, North of Washington, DC, and Florida.  How big was the bubble created?  It is estimated by Baker that the run-up in house prices “created more than $5 trillion in real estate wealth compared to a scenario where prices follow their normal trend growth path.  The wealth effect from house prices is conventionally estimated at five cents to the dollar, which means that annual consumption is approximately $250 billion (2 per cent of gross domestic product [GDP]) higher than it would be in the absence of the housing bubble.”

The succession of speculative manias in the US have had the function of absorbing investment that did not find profitable returns in the real economy, thus not only artificially propping up the US economy but also “holding up the world economy,” as one IMF document put it, owing to the stimulus to global production triggered by US middle class spending.  Thus, with the bursting of the housing bubble and the seizing up of credit in almost the whole US financial sector, we face not only a US recession but a global recession that will impact on, among other places, China, whose economic growth depends largely on the US and European markets and the Southeast and East Asian economies, including the Philippines, that supply China with the resources and components that it puts together as finished goods for export to the US and Europe.  In this connection, it was demand from China’s export-led industries that pulled us out of the doldrums of the financial crisis and became the main driver of growth in the early part of this decade.

One must not, however, overestimate the resiliency of capitalism.  Many are now asking: After the collapse of the dot.com boom and the housing boom, is there a third line of defense against stagnation owing to overcapacity?  One theory is that military spending could be a way that the government might pull the US out of the jaws of recession.  And, indeed, the military economy did play a role in bringing the US out of the 2001-2002 recession, with defense spending in 2003 accounting for 14 per cent of GDP growth while representing only four per cent of the GDP of the US.  According to estimates cited by Chalmers Johnson, defense-related expenditures will exceed $1 trillion for the first time in history in 2008.

Stimulus could also come from the related “disaster capitalism complex” so well studied by Naomi Klein–that “full fledged new economy in home land security, privatized war and disaster reconstruction tasked with nothing less than building and running a privatized security state both at home and abroad.” Klein says that, in fact, “the economic stimulus of this sweeping initiative proved enough to pick up the slack where globalization and the dot.com booms had left off.  Just as the Internet had launched the dot.-com bubble, 9/11 launched the disaster capitalism bubble.”  This subsidiary bubble to the real estate bubble appears to have been relatively unharmed so far by the collapse of the latter.

Whether or not “military Keynesianism” and the disaster capitalism complex can in fact play the role played by financial bubbles is open to question.  A critical  limit to military Keynesianism and disaster capitalism is that the military engagements to which they are bound to lead are likely to create quagmires such as Iraq and Afghanistan that could trigger a backlash both abroad and at home.  This would eventually erode the legitimacy of these enterprises, reduce their access to tax dollars, and erode their viability as sources of economic expansion in a contracting economy.  At least, I hope this is the case, though I also realize that it was via the adoption of war economies that the capitalist powers got themselves out of the Great Depression.

Yes, global capitalism may be resilient, but it looks like its options are increasingly limited.  The forces making for the long term stagnation of the global capitalist economy are now too heavy to be easily shaken off by the economic equivalent of mouth-to-mouth resuscitation.  Let me just say that  I agree with those who say that the global economic crisis before us might rival the Great Depression.  The accumulated pressures since the end of easy post-war growth in the mid-seventies have simply been too great to be warded off by another speculative mania.  We may in fact be on the way down to the trough of the latest Kondratieff Wave, those fifty-year supercycles of long-term-expansion and long-term contraction that have marked capitalism’s history. Dislocations are dangerous in that they open up the way to regressive solutions like war.  But the current crisis may also provide the opportunity for a transition to a more progressive global economic system where markets are brought under control and are disciplined by the public interest.  Indeed, since the 1980’s, there has been great disaffection that has built up globally over unfettered capital that is going to explode in the public arena.  This will mark what the great Hungarian economist Karl Polanyi described as the second phase of the “double movement” under capitalism: an era following a period of uncontrolled market gyrations when, forced by a civil society that is up in arms, governments again intervene, this time to stabilize the economy, bring about a just income distribution, eliminate poverty and—a critical goal in this era of global warming—promote environmental sustainability.

Thank you.

* Walden Bello is President of Freedom from Debt Coalition, senior analyst of the Focus on the Global South, and professor of sociology at the University of the Philippines at Diliman. 

Changing of the Guard at the IMF

Soren Ambrose and Bhumika Muchhala, Foreign Policy In Focus, October 31, 2007

Former French Finance Minister Dominique Strauss-Kahn, who becomes the International Monetary Fund’s new chief on November 1, has a lot of promises to keep.

Strauss-Kahn, known as “DSK,” traveled the world between his “nomination” by the European Union in July and his confirmation in late September by the IMF’s executive board, pledging a more open institution. Though he’s the latest beneficiary of the archaic “gentlemen’s agreement” that accords Western European countries the right to name the IMF’s head, Strauss-Kahn assured developing countries that he will be the last to be selected in this unfair manner, and that their position in the institution would finally be given due respect.

DSK replaces Rodrigo de Rato, who after three lackluster years at the IMF turned in his resignation. De Rato resigned as the Fund’s managing director two years before the end of his term, having failed to convincingly refute the common view that the IMF is rapidly losing its relevance in the global economy.

High Stakes

The stakes are high, and the challenge of recuperating the IMF’s reputation is formidable. Several high-ranking officials in Washington for the recent annual joint World Bank and IMF meetings privately denigrated de Rato’s three-year stint, saying that despite a number of internal reviews and a new strategic plan, the reform agenda seems to be stuck, and a wholly new effort will probably be required.

Over the last two years, many of the IMF’s largest middle-income clients, like Brazil and Indonesia, which still nurse bitter memories of the Fund’s involvement in their financial crises in the 1990s, have paid back their loans to the IMF early which deprives the Fund of anticipated interest payments. Meanwhile, these middle-income countries, especially in East Asia, have amassed currency reserves in order to “self-insure” themselves from having to borrow from the Fund again. And private credit markets offer cash in volumes that dwarf anything the Fund can possibly offer.

As a consequence, the role of the IMF has been sharply questioned even by its biggest shareholders. In his speech at the annual meetings, U.S. Treasury Secretary Henry Paulson stated that the Fund needs to re-evaluate its “core mission” and make “difficult decisions on priorities.”

Even more challenging, the IMF today finds itself made vulnerable through an income deficit, its first in decades, which approaches $100 million this year. The Fund’s loan portfolio has incurred a whopping $88 billion decline from $105 billion in 2003 to just $17 billion today, with most of this amount owed by Turkey and Pakistan. Although the Fund has gold holdings worth $76.9 billion, it is prevented by its bylaws from using them to cover its operating costs, and indeed from accessing them under almost any circumstance.

So, the IMF’s powerful shareholders (rich G7 countries) have called on the Fund’s executive board to cut costs and downsize staff in the next six months. Paulson urged the Fund to “reduce expenditures” at the recent annual meetings. Even Japan, which has traditionally been reticent on such matters, stated at the meetings that the Fund should cut spending significantly by “shedding non-core operations, organization, and staff.”

Better Voting Balance

Efforts to reform the IMF’s voting structure have also faltered, and its attempt to re-fashion itself as a convener of high-level negotiations about “global imbalances” (China’s controversial currency policies and the ever-growing deficits of the U.S.) has failed to produce any tangible results.

Strauss-Kahn is likely to be the most politically progressive IMF Managing Director ever (not that there’s much competition for that distinction). Hailing from the left side of France’s amorphous Socialist Party, as Finance Minister he boldly stood up to the neo-liberal consensus in Europe and implemented the still controversial 35-hour work week.

Although he failed to gain the Socialist nomination for President in the recent elections, he retains a strong following. Indeed, many believe that the new French President, Nicolas Sarkozy, pulled off a brilliant coup by finding a way to send a high-profile rival into exile by honoring him with a nomination for the IMF’s top seat.

Strauss-Kahn took a far more activist approach to his nomination than his predecessors. While de Rato and others certainly paid a few courtesy visits to prominent finance ministers and presidents, for the most part they allowed the forces of tradition to place them in the Managing Director’s chair. In contrast, Strauss-Kahn campaigned for the position despite having only one late entry as competition, Josef Tosovsky, a former Czech Finance Minister nominated by Russia and unable to attract the support of his own government.

Logging some 60,000 miles in a few months, DSK got finance ministers in Africa, Latin America, and elsewhere to put on the record their kind words about his nomination. In the process he managed to persuade not only developing countries but observers like the Financial Times, the foremost monitor of the international financial institutions, that he intended to use the IMF as a tool for addressing income gaps—which made the FT, a defender of the IMF’s customary role as lender-of-last-resort, far less happy than his target audience. Branding DSK “neither qualified or legitimate,” the Financial Times made little secret of its preference for Tosovsky, a well-known orthodox neo-liberal, though no one gave him a chance to gain the support of more than a few of the IMF’s executive board members.

Vision for the IMF

As part of his “campaign,” Strauss-Kahn published his “vision for the IMF” in the Wall Street Journal a few days before making his official appearance before the IMF’s board. In it, he stressed his commitment to rebuilding the Fund’s legitimacy and relevance, repeating his commitment to expanded voting powers for developing countries.

But on October 4, a month before his scheduled ascension, his efforts to re-cast the Fund’s image were dealt a blow by the board’s selection of a fellow European (Italian economic minister, Tommaso Padoa-Schioppa) as chairman of the International Monetary and Financial Committee (IMFC), the institution’s most powerful policy-advising committee, even after India’s finance minister, P. Chidambaram, had been widely tipped to become the first developing country figure to win the post. This move only further reinforced the widespread perception among its critics around the world of the Fund remaining a European Club.

DSK’s manifesto in the Journal did include at least one proposal with genuine promise: the use of “double-majority” voting on the IMF’s board for important decisions. This would mean that such decisions would require not only a majority of the board’s share-determined votes (in which count the U.S. has over 16% of the vote, and all of sub-Saharan Africa less than 5%), but also a majority of the “chairs,” or individual board members. Although board representation is also skewed (two members represent over 45 African countries, while eight wealthy countries have their own representative), such a mechanism would represent a greater move toward democracy than fiddling with a few percentage points of increase in the quota shares of just a few countries. (A civil society version of this proposal would require counting a majority of countries rather than board chairs, but DSK does not seem to be considering that).

One Currency, One Seat

At the recent annual IMF and World Bank meetings, it seemed that DSK may have gotten a little help from the new IMFC chair, Padoa-Schioppa, who said he agreed that Western Europe should occupy one seat on the board to make way for emerging economies — an idea long discussed but always resisted by the EU. The “IMF includes the word ‘monetary,’” stated Padoa-Schioppa at press conference on Sunday, October 21, “The EU has one money. It should consolidate.” However, the treatment of low-income countries, particularly African countries whose voting powers are almost negligible, is sub-par at best. Although French finance minister, Christine Lagarde, had stated in the French newspaper Liberation that the country would support the immediate tripling of African members’ basic votes, the outcomes of the annual meetings affirmed only doubling their basic votes—a wholly insufficient outcome according to the G-24, a body of developing country finance ministers and central bank governors, which has also called for a minimum of tripling the basic votes of the Fund’s low-income members.

How comfortable should we be with Strauss-Kahn’s seemingly more open and progressive attitudes? Most civil society organizations that monitor the Fund would like to significantly reduce its power to impinge on countries’ economic sovereignty and limit the scope of development spending. Strauss-Kahn, however, has reaffirmed that the Fund should remain involved in low-income countries (throughout Africa, the Caribbean, and Central America in particular), which are the last bastion of the IMF’s dwindling lending power.

What to Expect?

No matter who serves as the IMF’s Managing Director, it is probably too much to hope that he (all Fund chiefs have been white Western European men) would support reducing the institution’s role. If Strauss-Kahn proves to be as skillful a politician on the international stage as he was in France, it’s quite plausible that he could succeed in expanding the power and scope of the IMF’s work. This could intensify the negative impacts of the Fund’s policy influence, at least in low-income countries.

DSK has acknowledged that “It will be a hard task for all of us to rebuild both the relevance and the legitimacy of this organization.” But what should we expect of him? While his ideas and statements seem to be more assertive than de Rato’s, they may also be a tactical affirmation of the current-day critiques of the IMF in several circles ranging from academia, media, politics, and civil society.

Only time will tell if DSK will employ the determined political will necessary to walk his talk. His stated plans for governance reform may well get sidelined by the powers-that-be in IMF decision-making, namely, the E.U. and the United States. On the other hand, he may be able to pull through with some real reforms, particularly if he decides to augment the voices of the Fund’s low-income shareholders.

*Soren Ambrose is the manager of the Africa Program at Bank Information Center, based in both Washington, DC and Nairobi. Bhumika Muchhala is the associate of the IMF Program at Bank Information Center, based in Washington. They are contributors to Foreign Policy In Focus.

Client and Competitor: China and International Financial Institutions

*Shalmali Guttal, Focus on the Global South, May 2007

Introduction

International Financial Institutions (IFIs) are international institutions that provide financing to governments and private companies for social and human development, physical infrastructure projects, trade, investment, establishing new businesses, services delivery, etc. Many IFIs are private corporations such as Citicorp, Merrill Lynch, ICICI and Ing Vysa. Some are government run institutions that operate trans-nationally such as Export Credit Agencies (ECAs) and export-import (ex-im) banks. IFIs are often viewed as the main ‘agents’ of economic globalization in developing countries since they facilitate one of the most important pre-requisites for globalisation, i.e., capital.

The Peoples’ Republic of China (China) is a member of several IFIs. I will focus this presentation on China’s relationship with a particular sub-group of IFIs called Multilateral Development Banks (MDBs) and among them, three institutions: the World Bank (WB), the International Monetary Fund (IMF) and the Asian Development Bank (ADB).

MDBs were set up by governments to provide loans, grants and technical support to developing countries for the purposes of national development and poverty reduction. They include the WB, the ADB, the Inter-American Development Bank (IADB), the African Development Bank (AfDB), and the European Bank for Reconstruction and Development (EBRD). The IMF is not technically an MDB, but it is a multilateral financial institution that lends to developing countries when they face balance of payments problems.

The WB and the IMF are currently the most powerful of these institutions and global in their reach. Along with the World Trade Organisation (WTO), they form the three pillars of the “Bretton Woods system.” The WB and IMF were established at the same time, have joint governing Boards and always work in tandem with each other. The IMF determines macro level financial and economic policy frameworks for borrowing countries and is supposed to act as the global financial “watchdog” and lender of last resort. If countries are hit by severe financial crises and have no capital reserves left repay their creditors, the IMF is expected to provide emergency funds to get the country’s economy back on its feet. The WB on the other hand generally focuses on national and global development policies, programmes and projects and is extremely influential in national policy environments. It has also established itself as the premier knowledge institution in the fields of economic and social development, the environment and governance. The ADB, AfDB, IADB and EBRD are regional MDBs with mandates and objectives similar to those of the WB. In the Asia-Pacific region, the ADB has started to expand its stature in terms of project and development finance and policy influence, and is increasingly in competition with the WB.

MDB and IMF financing is done through grants and loans at concessional or near market interest rates, depending on the size of the borrowing country’s economy. All financing comes with policy conditions that require borrowing/recipient governments to adopt economic strategies for rapid economic growth, privatisation, deregulation, liberalisation and market driven approaches to development.

MDBs and the IMF are different from other IFIs in that they are constituted by governments and are supra-national public institutions. Each member government pays into the institutions a fixed amount of money called “subscribed capital” which determines the number of shares it holds in the institution, which in turn determines its voting power. The more shares a country has, the greater its voting power. MDB and IMF members include rich, poor, developed and developing countries. Not all MDB and IMF members are borrowers from these institutions. While some (such as the US, UK, Japan and Australia) have more or less permanent profiles as ‘donor members,’ others (such as China, India and the Philippines) are former borrowers from the IMF and continue to borrow from MDBs.

A country’s regional location is not a barrier for membership in an MDB. For example, the United States (US) and United Kingdom (UK) are members of the ADB and China is a member of the AfDB. Some members are developing countries with large economies that borrow from MDBs and at the same time also provide development aid to developing countries with smaller economies (such as China and India). Another important feature of the MDBs and IMF is that they are beyond the reach of national and international laws. Their founding charters provide them with full impunity against national and international legal proceedings and liability. It is easier to take a government to court than to take an MDB or the IMF to court.

Although MDBs were set up ostensibly to mobilise development finance, significant portions of their operations are directed towards boosting the private sector. Both the WB and the ADB have specialised institutions and departments to provide financing, investment advice and commercial and political risk guarantees to private companies and corporations investing in in developing countries.

China in the IMF, World Bank and ADB

Membership in the MDBs and IMF are opportunities for countries to wield influence on regional and global finance, economy, development and politics. How much influence a country can actually exert over the world economy and even within these institutions is of course based on its economic strength and potential. China has used its membership in the IMF and the MDBs extremely strategically to build itself up as an economic powerhouse, as well as position itself as political entity to reckon with.

There is a big difference between MDB members such as the Lao PDR and Cambodia on one hand, and the US and Japan on the other. The Lao PDR and Cambodia are low income developing countries, heavily indebted to MDBs and almost completely dependent on foreign aid for meeting social and economic development goals. They do not have enough votes to be able to influence decision making within MDBs about institutional policies and directions. The US and Japan on the other hand, are developed donor countries and along with other wealthy members, they are instrumental in shaping the policies and overall directions of these institutions.

China however, straddles both ends of the above spectrum. China is a developing country, but with an economy larger and more dynamic than some developed countries. China has a high domestic savings rate-in 2006, it saved approximately half its GDP, about US$ 1.1 trillion– and a growing trade surplus.

China’s quota in the IMF is US $ 8,090.10 million of Special Drawing Rights (SDRs). China’s percentage of votes in the IMF is 3.67 — the highest among developing countries, and sixth highest among all IMF members (countries with more votes than China are the US, UK, Germany, France and Japan). China is not a current borrower of the IMF and has no outstanding payments or loans to the IMF. At about US$ 900 billion, China’s foreign exchange reserves are much larger than the IMF’s lending capabilities. If China were to experience a financial crisis similar to the 1997 East Asian crisis, the IMF will not have the reserves required to bail it out. 

China is a Borrower…

China is both, a borrower from the WB and ADB, as well as one of the largest contributors of subscription capital to these institutions. The size of its economy, its geography, internal diversity, and its embrace of capitalism make it one of the most important clients of the WB and ADB.

China has 45,049 votes in the WB, which is 2.78 % of the total number of votes. Total WB lending to China from 1981-2007 amounts to US $ 41,911.51 million (i.e. Almost US$ 42 billion) for 281 projects. Of this, IBRD loans amounted to US$ 31,964.809 million (almost US$ 32 billion) and IDA assistance to US$ 9,946.71 million (almost $ 10 billion). In the fiscal year 2005-2006 alone, the WB lent China about US$1.45 billion for 11 projects.

China is fifth largest country portfolio of the International Finance Corporation (IFC) and one of the IFC’s fastest growing client countries. The IFC is a specialised agency of the WB Group that provides finance, investment advice and technical support to private companies investing in developing countries. From its first investment in 1985 up till June 30, 2006, the IFC has invested in 115 projects in China for which it has mobilised US$2.86 billion–US$2.24 billion from its own account, and US$ 930 million from other participating banks. In FY06, IFC committed $639 million to 24 projects in China.

In the ADB, China has the largest percentage of votes (5.442%) among what are called “Developing Member Countries” (DMCs) followed closely by India (5.352 %). DMCs are ADB members who borrow from the institution, as opposed to members such as Japan, the US, Australia, UK and Turkey. China gets ’sovereign,’ ’sub-sovereign’ and ‘non-sovereign’ loans and technical assistance (TA) from the ADB. Non-sovereign loans and TAs go to private sector actors and public sector enterprises without government guarantees.

China has received $17.95 billion loans in total assistance since joining the ADB in 1986. In cumulative terms, it is the ADB’s second largest borrower and the second largest client for private sector financing. In 2006, China was the ADB’s largest loan recipient and received $1.6 billion, or 21%, of the $7.4 billion in loans that the ADB extended in 2006. China also received the largest share of ADB’s non-sovereign loans and TAs in 2006-21 % of US$ 2.6 billion.

…As Well as Donor and Investor

At the same time, China is also a bilateral donor to numerous developing countries with smaller economies. As Chinese aid and investment become news items in Africa, China is also establishing itself as an economic powerhouse in its more immediate neighborhood–Southeast Asia. China is one of the most influential donors and investors in the Mekong region and Chinese capital, technology and labour are increasingly visible in transportation, energy, mining, agribusiness, plantations, telecommunication, tourism and recreation projects, especially in .Burma, Lao PDR and Cambodia. Chinese aid has moved further afield as well, to better off countries such as the Philippines and newly formed nations such as Timor Leste. And finally, China has spurred bilateral and regional trade with numerous Asian countries-including members of Association of Southeast Asian Nations (ASEAN)–by offered preferential tariff schemes (including zero tariffs) under “Early Harvest Programmes.”

Chinese aid comes in the form of cash and equipment grants, extremely low interest loans and unilateral debt relief. Much of it goes towards complicated physical infrastructure projects in difficult terrains such as remote rural roads, bridges over deep and fast flowing rivers, and deep sea ports. What makes Chinese aid particularly attractive to recipient countries is the fact that it comes unencumbered by the kinds of policy conditions demanded by the MDBs and northern donors for policy and governance reforms. Equally important, Chinese aid does not come with packages of expensive consultants that are commonplace in most northern development aid and MDB loan projects. Chinese ‘experts’ and consultants are not associated with the lavish lifestyles associated with their counterparts from northern aid agencies

In early 2006, China offered Cambodia US$ 600 million in loans with no strings attached for bridges, a hydro power plant and a fiber optics network to connect Cambodia’s telecommunications with that of Vietnam and Thailand. In contrast, later in the year Cambodia’s traditional donors and creditors collectively pledged US$ 700 laden with policy conditions, several related to checking corruption. Also in 2006, China offered the Philippines a package of US$ 2 billion in loans from its Export-Import Bank over the next three years, over-shadowing the US$ 200 million offered by the WB and ADB and the US$ 1 billion loan that was being negotiated with Japan.

China is criticised by northern donors and creditors for being secretive about its aid intentions and for its apparent unwillingness to coordinate aid activities through fora managed by the WB. It is true that Chinese announcements of aid, trade and investment packages often surprise even the governments to whom they are offered. And it would indeed be naive to assume that China’s donor ambitions are fueled purely by altruism or that there are really “no strings” attached to its generous offers. But for recipient countries, China presents both, an alternative source of development finance as well as a possible escape route from the never-ending cycle of policy conditions attached to more traditional bilateral and multilateral aid. Equally important, China’s aid and investment behavior is forcing MDBs and northern donors to be less high-handed with its poorer clients.

China is also a large contributor to projects sponsored by the ADB. In 2005, it contributed $30 million to the Asian Development Fund, and established the $20 million PRC Regional Cooperation and Poverty Reduction Fund-the first developing country to set up such a fund with an international development agency. By virtue of size and geographic spread, China is part of the ADB’s subregional programmes–the Greater Mekong Subregional Economic Strategy (GMS) and Central Asia Regional Economic Cooperation (CAREC)–in which it is viewed as a formidable investor. It is also getting involved in the South Asia Sub-regional Economic Cooperation (SASEC) by pledging investment towards transportation and energy infrastructure. 

Selective about Borrowings and Technical Assistance

China can afford to be and is selective about what it borrows money for and the nature of TA and ‘policy advice’ it takes from the MDBs. China goes to the MDBs for loans and TAs to enhance value addition to its agricultural, industrial, technological and finance sector capacities. It would not be far fetched to argue China uses MDB financing and TA to shore up its position as a global donor and investor.

Since 1999, China does not get concessional loans from IDA is only eligible for loans at near market terms from the IBRD. China’s portfolio is one of the largest in the WB and the Bank considers China to be one of its best-performing members in terms of project implementation. Sectors for which China currently accepts IBRD financing include transportation (inner provinces to coast), urban development (urban transport, water and sanitation), rural development, energy, and human development.

Sectors for which China has taken ADB loans include: agriculture and natural resources, energy, finance, industry and trade, transport and communications, water supply, sanitation, and waste management.

China is strategic about how it uses MDB financing. China is a very large country with tremendous geographic, cultural and demographic diversity, and economic and social disparities among its regions. While some of its regions are wealthy, it also has pockets of intense poverty. As China transforms itself into a global economic powerhouse, it needs to fill infrastructure, human, social and institutional development gaps, for which it uses the financing and TA from the MDBs. 

At the same time, China has built up an impressive manufacturing base over the past two decades by compelling Transnational Corporations (Tn Cs) who came to China seeking cheap labour costs to locate most of their production processes in the country rather than simply outsourcing a selected few production processes. Local governments within the country have also invested heavily to build up capacity in local industries which, combined with continuing foreign investments, have helped China to beef up its export-oriented growth strategy.

The paradoxical result is that even as China borrows from the MDBs to build new physical infrastructure in sectors such as transportation, water and urban development, and step up quality in sectors such as agriculture, energy and human development, it has a surplus of capital which it uses for bilateral aid and investment in poorer countries. Much of China’s foreign investment is in natural resources, oil and minerals (for example copper, cobalt, gold, and uranium) to feed its own rapidly growing economy. China’s growth figures and potential make it a more, rather than less attractive client for the MDBs and despite their economic clout, MDBs are willing to bend their lending policies to suit China’s development model in contrast to their less well off clients, who are compelled to accept the development strategies demanded by MDBs and northern donors.

A Preferred Client

MDBs need their large developing country clients such as China, India, Indonesia and Brazil because this is where their own bread and butter comes from. China repays its loans on time and although selective about the projects it borrows for, it borrows in large quantities and ensures that projects are generally implemented on schedule without messy delays caused by popular protests, parliamentary or congressional inquiries, or compliance with domestic social and environmental safeguard measures.

WB and ADB documents reveal that they definitely consider China to be an extremely important client. The ADB’s 2007-2008 lending pipeline to China totals about $3 billion; 85% of the lending projects are likely to be located in the poorer central and western provinces. TA for the same 2-year period will focus more sharply on high-priority, policy-related and knowledge-based products.

China is also a favoured client for carbon trade and associated projects. The ADB has given China a grant of US$ 600,000 to set up a fund to help the country benefit from the potential multi-billion dollar revenues from the Clean Development Mechanism (CDM). The ADB estimate that China can generate “certified emission reductions” (CERs) credits of between 150 to 225 million tons of carbon dioxide equivalent per year, which translate to a potential annual revenue stream of up to $2.25 billion. The Chinese Government is expected to use this grant to establish a specialized facility–the CDM Fund–which will collect levies on the revenues generated by various CDM projects through CER credits. The CDM Fund will be used to support domestic climate change related activities.

The ADB is clearly willing to make adjustments to its own strategy and policies to accommodate China: “The country’s rapid economic development and its growing importance in the global and regional economy require ADB to keep its operations relevant to PRC’s needs at the strategic level and add value to the country’s future development.” And further, “ADB needs to establish a niche for itself in the PRC’s rapid development process over the next 5-10 years.” The ADB plans to establish this niche by:

a) Increasing its sectoral coverage in agriculture and rural development, energy conservation, environmental protection, urbanization, social development, financial reforms, and regional cooperation. In other words, in whichever direction China expands, the ADB is willing to follow.

b) Reducing “transaction costs” to the client and introducing innovative assistance products-which means that China will be allowed to bend whatever rules needed to keep it borrowing from the ADB; even the minimal social and environmental safeguards proposed by the ADB will not be applicable to China;

c) Expanding private sector operations, particularly in the infrastructure sector, through private-public partnerships-China’s geographic size and diversity, natural resources, population and increasing incomes offer huge revenue opportunities for the private sector which the ADB hopes to attract by getting the Chinese Government to sponsor projects through private-public partnerships.

On its part, the WB has lined up three of its agencies to continue to respond to China’s needs. The IBRD is oriented towards supporting priority projects in China’s Five Year Plan–especially for infrastructure, rural development and natural resource management-by providing loans for physical infrastructure investments, administering loans and grants provided by bilateral donors, and TA in the form of ‘policy advice,’ capacity building and analytical services. The Bank considers “knowledge sharing and transfer” particularly important in its relationship with China, both, in terms of advising the Chinese government on constraints to private investment, social and financial service delivery and economic growth, as well in advocating China’s so called “success stories” in poverty reduction through increased economic growth.

The IFC recognises that the private sector has become a critical component of China’s economy, boosting its economic power domestically as well as abroad. One of the conditions attached to IBRD loans to China is that state owned enterprises be privatised in order to boost efficiency and generate sufficient revenues so as to not be a drain on government expenditure. While a lot of IFC support actually goes to large, often foreign-owned companies, the IFC claims that its support for local small and medium enterprises–which have limited national institutional support-will help to alleviate the negative effects of the so called “transformation” of state owned enterprises.

For the IFC, China presents a wealth of opportunities for enhancing its own institutional profile and increasing its profits. The IFC is particularly interested in China’s efforts to liberalize its financial sector since it offers the Bank new opportunities to support the development of private institutions in the banking and insurance sectors. Its China operations are focused on:

• Encouraging the development of China’s local private sector, including small and medium sized enterprises.
• Investing in the financial sector to develop competitive institutions that will meet international corporate governance and operating standards.
• Supporting the development of china’s western and interior provinces.
• Promoting private investment in the infrastructure, social services and environmental industries.

Also poised for greater expansion is the Multilateral Investment Guarantee Association (MIGA), which already provides private investors guarantees against “sub-sovereign” (i.e., at provincial, city, county, or district levels) risks, especially in infrastructure and water projects. MIGA is particularly eager to facilitate Foreign Direct Investment (FDI) in China by providing guarantees and TA to support China’s western and northeast regional development strategy and Chinese outward investment.

Positioning Itself and Calling the Shots

In regional and global MDB platforms, China presents a strong ’southern’ position, argues for greater south-south cooperation, challenges the hegemony of the industrialised north in providing aid, investment capital and technology, and defends the rights of developing countries to self-determination.

Although, China certainly benefits greatly from the infrastructure it finances (such as roads, ports, bridges, factories and hydro-power plants) by gaining access to raw materials, energy, capital and trade markets, Chinese policy makers argue that China is using its growing wealth to create development opportunities for less well off developing countries and in the long term, is fostering peace, harmony and solidarity among developing countries.This is not to say that China supports information disclosure and public accountability in the MDBs or dialogue between MDBs, host governments and civil society. On the contrary. Chinese representatives in MDBs and other regional/global platforms are notorious for being aloof and unapproachable to civil society and other ‘non-official’ representatives. What China argues for is the sovereign rights of governments to shape their own development strategies and to make decisions about projects and policies regardless of social, environmental and governance implications. It matters little to China that building eight dams on the Lancang river (the upper Mekong) in what it considers its sovereign territory will have negative impacts on critical ecologies and livelihoods in countries located downstream. It will purchase the compliance and cooperation of disgruntled governments by offers of roads, energy projects, and trade and investment preferences.

Along with other large borrowers such as India, Brasil, Indonesia and South Africa, China is shaping the lending and operational policies of many MDBs. Many middle-income clients have expressed unwillingness to borrow from the WB and ADB for large infrastructure projects if they are required to adhere to the environmental and social safeguard policies that come as part of the financing packages. China and India, for example, already have access to project finance from international capital markets and refuse to be subjected to what they consider onerous and intrusive external social and environmental standards for projects that benefit the investors as much as they benefit the host country. Objections have also been raised about the inspection mechanisms of these institutions, which (at least in theory) can be used to halt or delay projects deemed as violating their social, environmental and financial safeguard measures. The response of the WB and ADB has been to pare down their own-already minimal–safeguard measures to keep developing country governments happy and borrowing.

In early 2005, the WB initiated a pilot programme called “country systems” through which the Bank would apply a borrowing country’s own environmental and social safeguard systems to assess the potential impacts of infrastructure and other projects. Although couched in language such as “expanding development impact,” “increasing country ownership,” “building capacity,” “facilitating harmonisation” and “increasing cost effectiveness,” the main impulse behind the programme seems to be to: a) ensure that the Bank continues to have a presence in large infrastructure projects either through direct financing, or through ‘advisory’ services, and; b) transfer responsibility for negative social and environmental impacts onto host governments since it is now their safeguard measures that are to be followed. Environmental activists indicate that the institution may well be on a path of “downward harmonisation” of project standards to ensure that it does not lose its infrastructure borrowing clientèle.

The ADB has taken similar measures with regard to its public information policy, inspection policy and safeguard policy. The newly revised public information policy does not even recognise the ‘public’ as a principle target audience and is tailored to meet the informational needs of the private sector and governments. The unfortunate story of the ADB’s inspection policy bears telling. The very first project that the inspection policy was tested on was the Samut Prakarn Wastewater Management Project (SPWMP) in Thailand. Thai government officials and ADB staff responsible for the project not only rejected the grounds for inspection, but also refused to cooperate with the inspection team. Despite numerous set-backs, the inspection team found grave violations of the ADB’s operational policies and directives and made recommendations accordingly. Senior ADB Management and staff by and large dismissed the findings of the inspection team and refused to acknowledge any wrongdoing on their part. Most unexpected, however, was the response of the ADB’s Executive Directors (EDs) to the inspection report, most of who rejected the report. The strongest and most vociferous rejection came from Mr. Zhao Xiaoyu, the ED for China, who called the SPWMP inspection result skewed, biased and a “lousy course of dish,” invoked the experience of the WB’s inspection of China’s Western Poverty Project as as an example of how MDB staff can be demoralised by externally led investigation efforts. According to Director Xiaoyu, the WB inspection result induced Bank staff to maintain “…big China maps on the wall with little red flags pinned here and there….. The marks stand for regions with ethnic residents and the staff are constantly reminded to keep away from these places.” As a result of the controversy surrounding the SPWMP inspection process and the rejection of the inspection report by the ADB’s most influential borrowers, the ADB’s inspection policy has become so watered down that it may as well cease to exist.

The readiness of the MDBs to make adjustments to their lending and governance policies to suit borrowing governments poses important and tricky strategic questions for civil society organisations (CSOs) who are fooled into believing that MDBs are actually development institutions that can be made to stop bad projects by operational directives, safeguard measures, etc.

Conclusion

The above arguments are not intended to valourise China’s dealings with MDBs or its role as an external donor and investor. From a constructive start possibly based on southern solidarity politics several decades ago, China’s current aid and foreign investment practices have begun to dangerously resemble colonialism. And certainly, China’s intentions, tactics and overall strategy should be closely monitored by civil society actors and challenged as needed, much as we would do in the case of any other country with colonial ambitions.

What is interesting in the case of the MDBs, however, is that China exposes them for what they are-bankers and financiers whose first and last priorities are to push loans and financing regardless of the costs, and recoup money and make profits for their shareholders.

China’s relationship with the MDBs defies easy categories. On one hand, China uses MDBs to leverage access to relatively cheap capital and technical support to meet its own growing infrastructure, human and social development, technological and institutional needs; here it is no different from other middle income developing countries. On the other hand, China uses MDBs to expand its economic reach, and access markets and investment opportunities in other developing countries through MDB projects and programmes; and here, it is no different from developed countries. In both cases, China is using MDBs to shore up its economic, financial, political and strategic advantages and potential.

China is too important a country in the world of development finance and financial institutions for civil society to ignore. Rather than look for clear “for” or “against” positions on China, we need to find and create opportunities to engage with this newly emerging economic super-power. Given the Chinese Government’s recalcitrance to engage in dialogue with external civil society actors, this is indeed a daunting task. It is crucial that researchers, academics and representatives from workers and farmers’ unions, indigenous peoples’ organisations and other civil society organisations from outside China build strong collaborative relationships with their Chinese counterparts. In the long term, the voices of caution and conscience that Chinese policy makers are most likely to listen to are those of the Chinese public.

* The author can be reached at s.guttal@focusweb.org

Appendix

China in the World Bank

The World Bank was established in 1944, as the International Bank for Reconstruction and Development (IBRD) primarily to speed up the reconstruction of post World War 2 Europe.. Since then, it has expanded to five specialised agencies which include the IBRD and the International Development Association (IDA). IBRD makes loans to middle income development countries at interest rates slightly less than market rates. IDA makes extremely low interest (concessional) loans and grants to low income developing countries. The name, “World Bank” is now commonly used for the IBRD and IDA. From its initial 38 members in 1944, the it now has 185– almost all the countries in the world.

The United States (US) is the largest single shareholder, with 16.41 percent of the votes, followed by Japan (7.87 percent), Germany (4.49 percent), the United Kingdom (4.31 percent), and France (4.31 percent). The rest of the shares are divided among the other member countries.

China has 45,049 votes in the World Bank, which is 2.78 % of the total number of votes. China’s portfolio is one of the largest in the World Bank and the Bank considers China to be one of its best-performing members in terms of project implementation. Bank projects are evident in every region of the country.

Since 1999, China does not get IDA assistance and is only eligible for IBRD loans; overall, external development assistance in China is reducing.Total Bank lending to China from 1981-2007 is US $ 41,911.51 million (i.e. Almost US$ 42 billion) for 281 projects. Of this, IBRD loans amounted to US$ 31,964.809 million (almost $ 32 billion) and IDA assistance to US$ 9,946.71 million (almost $ 10 billion). In the fiscal year 2005-2006 alone, the Bank lent China about US$1.45 billion for 11 projects.

Sectors to which current Bank financing goes: transportation (inner provinces to coast), urban development (urban transport, water and sanitation), rural development, energy, and human development.

China in the International Finance Corporation (IFC)

The IFC is a specialised agency of the World Bank Group that provides finance, investment advice and technical support to private companies investing in developing countries. The IFC is the fastest growing agency of the World Bank Group and proudly reports that all of its projects, as well as the agency itself, have made notable profits to date.

China is IFC’s fifth largest country portfolio and is one of the IFC’s fastest growing client countries.

From its first investment in 1985 up till June 30, 2006, IFC has invested 115 projects in China for which it has mobilised US$2.86 billion–US$2.24 billion from its own account, and US$930 million from other participating banks. In FY06, IFC committed $639 million in 24 projects in China.

The IFC recognises that the private sector has become a critical component of China’s economy. One of the conditions attached to IBRD finance for China is that state owned enterprises start to be privatised in order to boost efficiency and generate sufficient revenues so as to not be a drain on government expenditure. While a lot of IFC support actually goes to large, often foreign-owned companies, the IFC claims its support for local small and medium enterprises–which have limited institutional support-will help to alleviate the negative effects of the so called “transformation” of state owned enterprises.

IFC operations in China are focused on:

• Encouraging the development of China’s local private sector, including small and medium sized enterprises.
• Investing in the financial sector to develop competitive institutions that will meet international corporate governance and operating standards.
• Supporting the development of china’s western and interior provinces.
• Promoting private investment in the infrastructure, social services and environmental industries.

The IFC is also interested in China’s efforts to liberalize its financial sector since it offers the IFC new opportunities to support the development of private institutions in the banking and insurance sectors.

China in the IMF

The IMF was formed in 1944 along with the IBRD (World Bank) and has 185 members. China joined the IMF in 1945.

China’s quota in the IMF is US $ 8,090.10 million of Special Drawing Rights (SDRs). China’s percentage of votes in the IMF is 3.67 — the highest among developing countries, and among the first 6 of all IMF members (countries with votes higher than China are the US, UK, Germany, France and Japan).

China is not a current borrower of the IMF and has no outstanding payments or loans to IMF. In fact, China’s foreign exchange reserves are almost twice the IMF’s current lending capabilities. 

China in the ADB

The ADB was founded on December 19, 1966. It has 67 members, 19 of which are not from the Asia-Pacific but from Turkey, Europe, North America and Australia. The ADB member with the largest percentage of votes in the Asia-Pacific region is Japan (12.756%), which ties with the US (also 12.756 %) for voting shares. The ADB raises its funds through bond issues on the world’s capital markets, members’ contributions, retained earnings from lending operations and the repayment of loans. The ADB has ’sovereign,’ ‘non-sovereign’ and ’sub-sovereign’ clients. Sovereign clients are national governments; sub-sovereign include local, state, province, etc. government actors, and; non-sovereign includes private sector actors as well as public sector enterprises without government guarantees.

China became a full member of the ADB in March 1986. It is considered a ‘DMC,’ i.e., a Developing Member Country. Among the ADB’s DMCs, China has the largest percentage of votes (5.442%), followed closely by India (5.352 %).

China has received $17.95 billion loans in total assistance since joining the ADB in 1986. In cumulative terms, it is the ADB’s second largest borrower and the second largest client for private sector financing. However in 2006, China was the largest loan recipient and received $1.6 billion, or 21%, of the total loans that ADB extended in 2006.

In 2006, the ADB approved a total $7.4 billion in loans in 2006, reflecting a 28% increase over 2005. By the end of 2006, ADB’s overall support for non-sovereign operations reached $2.6 billion, consisting of $915 million in equity investments, loans of $1.3 billion, and guarantees amounting to $401 million. Non-sovereign financing was largest in the infrastructure sector with a total $1.2 billion, followed by the financial sector with $822 million, investment funds and capital markets with $446 million, and exposure to other sectors at $110 million.

Non-sovereign exposure was largest in the People’s Republic of China with a share of 21% of total non-sovereign exposure, followed by Indonesia with 14%, India with 13%, and Kazakhstan with 9%.

Sectors to which ADB financing has gone: Agriculture and Natural Resources; Energy; Finance; Industry and Trade; Multi-sector; Transport and Communications; Water Supply, Sanitation, and Waste Management.

China is also a large contributor to the ADB. In 2005, it contributed $30 million to the Asian Development Fund, and established the $20 million PRC Regional Cooperation and Poverty Reduction Fund-the first developing country to set up such a fund with an international development agency.

By virtue of size and geographic spread, China is part of the ADB’s subregional programmes: the Greater Mekong Subregional Economic Strategy (GMS) and Central Asia Regional Economic Cooperation (CAREC). It is also getting involved in the South Asia Sub-regional Economic Cooperation (SASEC) by pledging investment towards transportation and energy infrastructure.

China is also favoured client for carbon trade and associated projects. The ADB has given China a grant of US$600,000 to set up a fund to help the country benefit from the potential multi billion dollar revenues from the Clean Development Mechanism (CDM). The ADB estimate that China can generate “certified emission reductions” (CERs) credits of between 150 to 225 million tons of carbon dioxide equivalent per year which translate to a potential annual revenue of up to $2.25 billion. The Chinese Government is expected to use this grant to establish a specialized facility–the CDM Fund–which will collect levies on the revenues generated by various CDM projects through CER credits. The CDM Fund will be used to support domestic climate change related activities.

ADB documents reveal that they definitely consider China to be an extremely important client. The ADB’s 2007-2008 lending pipeline to China totals about $3 billion; 85% of the lending projects are likely to be located in the poorer central and western provinces. Technical assistance for the same 2-year period will focus more sharply on high-priority, policy-related and knowledge-based products.

The ADB’s assessment of China’s future economic and political potential indicate that it is willing to make adjustments to its strategy and policies to accommodate China: “The country’s rapid economic development and its growing importance in the global and regional economy require ADB to keep its operations relevant to PRC’s needs at the strategic level and add value to the country’s future development.” And further, “ADB needs to establish a niche for itself in the PRC’s rapid development process over the next 5-10 years..”

The ADB’s strategies for establishing this niche are:

a) Increase its sectoral coverage in agriculture and rural development, energy conservation, environmental protection, urbanization, social development, financial reforms, and regional cooperation-in whichever direction China expands, the ADB follows.

b) Reduce “transaction costs” to the client and introduce innovative assistance products-which means that China will be allowed to bend whatever rules needed to keep it borrowing from the ADB; even the minimal social and environmental safeguards proposed by the ADB will not be applicable to China;

c) expand private sector operations, particularly in the infrastructure sector, through private-public partnerships-China’s geographic size and diversity, natural resources, population and increasing incomes offer huge revenue opportunities for the private sector which the ADB hopes to attract by getting the Chinese government to sponsor projects through private-public partnerships.

References: 

 http://money.cnn.com/2006/03/03/news/international/chinasaving_fortune/

 High savings lead to trade surplus . chinanews.cn. 2006-06-16 07:02

See also, http://www.rieti.go.jp/en/china/06122702.html

 The SDR is the unit of account of the IMF; it is a potential claim on the freely usable currencies of IMF members, more information about how IMF quotas and SDRs are calculated is available on the IMF website.

IBRD stands for International Bank for Reconstruction and Development. The IBRD is one of the five institutions of the Wold Bank Group and makes loans at near market interest rates to middle income developing countries.

IDA stands for the International Development Agency and is one of the five institutions of the Wold Bank Group. It provides grants and concessional loans (with low interest rates) to lower income developing countries.

 Other major borrowers from the ADB in recent years include Indonesia, India, Pakistan, and Viet Nam

 Chain-Gang Economics: China, the US, and the Global Economy . Walden Bello. November 1, 2006. 

 By obtaining certified emission reductions (CERs) from projects in developing countries, developed countries can escape cutting down greenhouse gas emissions; CERs are usually generated through by financing so called “sustainable development projects” in developing countries.

 http://www.adb.org/Media/Articles/2006/10594-PRC-CDM-potential/

 See the ADB web page for the PRC (www.adb.org/prc) and follow links.

 Created in 1988, MIGA is the World Bank Group’s newest member. It provided guarantees (political risk insurance) to foreign private investors against the risks of expropriation, transfer restriction, breach of contract, and war and civil disturbance; it also provides TA to host governments on means to attract more Foreign Direct Investment (FDI).

 World bank Click for link

The minutes of the Board meeting in which the ADB Executive Directors discussed the inspection report was leaked to the public. Sections of it can be found in a May 2002 publication by Focus on the Global South: Too Hot to Handle, The Samut Prakarn Wastewater Management Project Inspection Process which can be downloaded from the Focus website (www.focusweb.org). Mr. Zhao Xiaoyu’s remarks can be found on pages 39-42.

 http://go.worldbank.org/UXQ9BZPG50

 The SDR is the unit of account of the IMF; it is a potential claim on the freely usable currencies of IMF members, more information about how IMF quotas and SDRs are calculated is available on the IMF website.

 Other major borrowers from the ADB in recent years include Indonesia, India, Pakistan, and Viet Nam

 By obtaining certified emission reductions (CERs) from projects in developing countries, developed countries can escape cutting down greenhouse gas emissions; CERs are usually generated through by financing so called “sustainable development projects” in developing countries.

 http://www.adb.org/Media/Articles/2006/10594-PRC-CDM-potential/

 See the ADB web page for the PRC (www.adb.org/prc) and follow links.

People’s Tribunal against WB, IMF, ADB announced in Bangladesh

NewAge, November 4, 2007. Dhaka, Bangladesh

Academics, economists, politicians and activists jointly announced the formation of a people’s tribunal against the World Bank, International Monetary Fund and the Asian Development Bank on Sunday.

The announcement was made at a press briefing at the National Press Club in Dhaka, a few hours before the arrival of the World Bank president, Robert Zoellick.The tribunal’s national preparatory committee was convened after former justice, Golam Rabbani, announced its formation.

Anu Muhammad, professor of economics at Jahangirnagar University, briefly outlined the plan of action while presenting the concept note. He said in the next six months there will be investigations into the effects that the lending agencies have had on various sectors including jute, water, power and energy, health, education and agriculture.

These investigations will then be used to build up cases against the agencies at the tribunal which will be headed by former justices. He said the investigative process would naturally be as inclusive as possible and the tribunal would try to involve people from the entire cross-section of society.

The people’s committee would include researchers, economists, educationists, politicians and members of various professional bodies.

‘The policy prescriptions of the lending agencies have destroyed Bangladesh’s potential for development and are merely another form of colonisation. The People’s Tribunal will try to find the ways and means of breaking the shackles that the lending agencies have wrapped around our country,’ said Anu.

MM Akash, professor of economics at Dhaka University, said, ‘Through the work of the tribunal and the tribunal itself, we want to tell the lending agencies, “this far and no further”. It is time we turned around and resisted them.’

Golam Rabbani, who presided over the briefing, said, ‘This is a fight against capitalist imperialism that the agencies advance on behalf of their masters.’

M Anisur Rahman, a former pro vice-chancellor of Rajshahi University, expressed wholehearted solidarity with the initiative and urged the organisers to ensure that the tribunal is genuinely a people’s tribunal, because the involvement of the general masses was imperative to make it effective and its verdicts heard and regarded by everyone.

KAM Saduddin, a former professor of sociology of Dhaka University, said, ‘It is indeed the people’s demand that such a tribunal should be formed. The instances of secret and confidential agreements between the government and other parties in the name of the people are numerous. This tribunal will be one of the means to bring about some accountability in this regard.’

Faiz Ahmed, a noted journalist and writer, said although such an initiative could have been taken earlier, it is never too late. ‘We understand the harmfulness of the ill-motivated lending agencies. And the People’s Tribunal is only the outcome of that awareness.’

A number of noted citizens and intellectuals have expressed solidarity with the tribunal and agreed to be a part of it. They include Habibur Rahman, a former chief justice and also a former chief adviser of a caretaker government, Serajul Islam Chowdhury, a professor of English of Dhaka University, and Professor Muzaffar Ahmad, a former teacher of economics who is currently the chairman of Transparency International’s Bangladesh chapter. The tribunal also enjoys the support of a large number of progressive and left-leaning political organisations, business quarters, non-governmental organisations and intellectuals.

IMF suggestions to Bangladesh to hit the majority hard

Editorial, NewAge, October 27, 2007. Dhaka, Bangladesh

The International Monetary Fund has recently submitted a set of recommendations to the central bank. According to a report in New Age, the lending agency has recommended scrapping of zero tariff and tax exemption facilities besides expanding the coverage of value added tax. It has asked the government to implement these measures by next year and have them approved by the agency in order for it to continue to provide support. Reportedly, the prescriptions require the government to frame new tax legislations. The IMF recommendations have a myopic objective of merely increasing the exchequer’s revenue without any consideration to the welfare of the common people. Lending agencies, being removed from the ground realities, typically make such recommendations and have brought about economic crises in many countries across the world, and are thus losing their ground.

The zero-tariff facility that had been in place was mostly offered in the case of industrial raw materials and capital machinery in order to encourage industrialisation. Mirza Aziz, the finance adviser to the military-driven interim government, surprised even those quarters privy to the budget-making process, when he declared in June this year sweeping tariff measures scrapping this facility for hundreds of items that would surely impede industrialisation. Higher import tariffs of such machinery and raw material would only discourage further investment and thereby hamper employment generation, increase of wage and eventually lead to low economic growth. The tax exemption facility is in place once again, only to encourage investors to establish industrial units in the country. Scrapping this provision would only send out wrong signals. Such measures – low import tariff of raw materials and machinery, and tax exemption – have been followed by countries, including those that today instigate these agencies to recommend the contrary, on their path towards economic prosperity and development.

The value added tax, as we have previously mentioned, burdens the common man since it is paid by everyone and at the same rate regardless of their affluence. Increase in the coverage of this indirect tax would only mean that the common people, especially those from the poorest section of the populace, who are outside the income tax net, would have to pay taxes. This tax, in the case of education and health services, would in fact amount to penalising citizens for seeking enlightenment or for striving to be in good health. Such measures would also seem to deny that the government itself is obligated to provide such services to its citizens.

We find the recommendations made by the lending agency inappropriate and inconsiderate of the plight of the common man. These recommendations, increasingly nudging the state towards a free market economy that results in inequity and disparity, are more likely to bring about crises and economic devastation than genuinely trigger wholesome development, like they have done in many other countries. We expect that the government will not give in to the pressure of the lending agency for the sake of national interest.

News and update: IMF sets fiscal agenda for Bangladesh government

Nazmul Ahsan, NewAge, October 26, 2007. Dhaka, Bangladesh

The International Monetary Fund has set economic and financial agenda for the government of Bangladesh in advance for the next fiscal year, asking the latter to implement those to qualify for future assistance.

The lending agency wants the government to agree to implement the policies and fiscal reforms spelt out in a recent document by November, finance and central bank officials said. In its latest move, the IMF asked the government to initiate budgetary exercises by further reducing the zero-tariff facility, tightening tax exemptions scheme and expanding value added tax.

The government is asked to get these recommended budgetary measures for the next fiscal year endorsed by the Fund by May, 2008, one month before the next fiscal year begins. The wish list and conditions summarized in a document, styled ‘economic and financial policies for November 2007,’ have recently been submitted to the Bangladesh Bank and the finance ministry.

Implementation of the conditions is linked to the future assistance from the Fund under its PRGF (poverty reduction growth facility) arrangement, sources said. ‘The attached draft document on economic policies more fully outlines the type of reforms that would be needed to support a request for a PRGF arrangement,’ reads a letter of Thomas Rumbaugh, IMF’s adviser for Asia and Pacific, written to finance adviser AB Mirza Azizul Islam recently. ‘It is drafted to reflect policies to be agreed and implemented by November 2007, a possible date for finalising a PRGF request, as well as policy commitments through December 2008’, the letter further reads.

According to the list, the IMF has asked the government to reach an agreement with the lending agency by May 2008 on the tax measures to be taken in the 2008-09 fiscal year. The government will have to get the Fund’s approval for new income tax law, reduction in number of zero-rated commodities, expansion of VAT to retail level and phasing out of remaining tax exemptions.

The IMF’s latest script on the economic and financial policies will also require the government to rewrite the income tax legislation by February 2008 and assess the cost and efficiency of all income tax exemptions.

Furthermore, it asked the government to enact a new VAT law with a modern invoice-credit based system, and separate excises from VAT. Officials at the finance ministry and National Board of Revenue expressed their reservations over the IMF’s suggestion for further reducing zero-tariff facility in the next budget.

The government drastically reduced the same facility in the current budget amid widespread criticism from industrialists, chamber leaders and economists, they argued. ‘We should not go for further reduction in zero tariff facility and tightening tax exemption to appease the IMF,’ a member of the NBR told New Age. ‘The present government did the same thing in the current budget ignoring the reservation of revenue officials,’ he added.

The budget for the current fiscal year withdrew zero-tariff facility from above 400 items, mostly raw materials and capital machinery at the insistence of the IMF at the last moment, sources said.

Four per cent infrastructure development surcharge has been withdrawn from about 2600 items, of which more than 1600 are finished and luxury products, sources said. Industrialists and economists said the measures cost the local industry heavily and opened the floodgate for less important imports.

Revenue officials said the government cannot withdraw all tax exemptions overnight, which could stall the growth of local industry. An NBR survey in March 2006 revealed that tax exemptions cost the government heavily. Tax relief enjoyed by corporations and big businesses cost the exchequer Tk 350 crore in foregone revenue during the 2004-05 fiscal year alone. These exemptions accounted for nearly 74 per cent of the total revenue forgone by the government in order to encourage and facilitate industry during the period. Currently, tax exemptions are offered to the corporate sector under about 18 categories and another 20 categories at individual level, tax officials said.

Asked about the rationality of the IMF conditions and necessity for further PRGF arrangement, economist Anu Muhammed said no government with dignity can reach agreements with a multilateral lending agency on how to frame its budget and what fiscal measures would be taken. ‘It is humiliating and disgraceful, and the government should reject such diktats outright,’ he told New Age on Thursday.

The economist also opposed any further deal with IMF for PRGF as he believed that there was no link of poverty reduction with the PRGF, which is designed to destroy the country’s industrial base and which has been rejected by many countries.

Bangladesh govt should not fall for new WB-IMF trick

Editorial, NewAge, October 24, 2007. Dhaka, Bangladesh

The International Monetary Fund has approached the government for a new loan agreement after the expiry of the previous arrangement, reported New Age on Tuesday. The IMF deputy managing director, Takatoshi Kato, made the offer during a meeting with the finance adviser to the military-backed interim government, AB Mirza Azizul Islam, in Washington on Sunday, saying the fund was willing to remain actively engaged with Bangladesh in any form that is deemed ‘suitable and appropriate.’ According to a news release of the Bangladesh embassy in Washington, the IMF also hoped that the government would ‘seriously keep in view the urgent need to contain the rising inflationary trend through appropriate policies which it finds appropriate.’ Mirza Aziz, for his part, sought increased assistance from the World Bank at a meeting with the bank’s vice-president for South Asia, Praful C Patel. The suggestion one may gather from the news release is that the endorsement of the country’s economic policies and the government’s efforts to maintain stability by the lending agencies is a matter of great relief, which is rather infuriating. It is insulting to the intelligence and vision of the policymakers and bureaucrats that the aptness of our policies must be ascertained by agencies that have consistently failed to bring about equitable and wholesome development.

Despite opposition of local business bodies, economists and a section of citizens, the incumbents have unfailingly implemented and adopted policies in line with the preferences of the lending agencies. These decisions – increasing prices of energy and utilities, privatising public enterprises and adopting a precautionary monetary policy, to name a few – have increased the cost of living, created unemployment and given rise to further inflation. In reference to another report published on the same day in New Age, it appears that the incumbents are not satisfied with merely submitting to the will of these lending agencies but are out to ensure that there are no dissenting voices among the bureaucrats either. Badiur Rahman, recently removed from the position of chairman of the National Board of Revenue, at a press conference hinted as much. He claimed that he had recently had differences of opinion with the government regarding prescriptions of the lending agencies.

Thanks to the high export growth and increased remittance flow that shows no sign of reversal, Bangladesh currently has about a $5 billion worth of foreign exchange; and thanks to an unprecedented growth of the GDP, the current overseas assistance is miniscule in proportion to the GDP. A number of academics and a large section of the citizens rightly believe that the country would not be worse off without the loans from the international financial institutions. We believe there are enough resources and the economy has sufficient vibrancy and maturity to survive without the assistance of these agencies that have only spelled disaster for a number of countries across the world and are, therefore, losing ground globally. The incumbents should look towards countries that have made remarkable advances in economic prosperity and human development and look to implement those proven policies instead of those that have proved to invite crises.

News and Update: IMF wants fresh loan deal with Bangladesh

NewAge, October 23, 2007. Dhaka, Bangladesh

The International Monetary Fund has expressed its willingness to remain actively engaged with Bangladesh in any form that is deemed ‘suitable and appropriate’ by the government. This offer was made by the deputy managing director of the lending agency, Takatoshi Kato, during a meeting with the finance and planning adviser, AB Mirza Azizul Islam, in Washington on Sunday.

An IMF delegation that recently visited Bangladesh returned without making any concrete progress on a fresh loan agreement styled ‘Policy Support Inst